Electricity reform too slow: Productivity Commission

Last year, Prime Minister Julia Gillard obtained an agreement from the Council of Australian Governments for network reform.
Photo: Luis Ascui

by
Marcus Priest

The Productivity Commission has criticised state and federal governments for failing to tackle rising power prices fast enough and argued energy reforms last year did not go far enough.

The government’s independent think tank called for deregulation of retail power prices by 2015, full privatisation of state power assets, lowering of electricity network reliability standards, and staged roll-out of smart meters.

If the changes were implemented in NSW $1.1 billion in distribution network capital expenditure could be deferred. Critical peak pricing and smart meters could save the average home up to $200 a year.

“The NEM [National Electricity Market] has too often proved to be a graveyard for reform proposals, which then remain as inert words in dead documents," the commission says in a report on electricity networks.

‘Frustrated by complex processes’

“Reform appears to have been frustrated by complex processes, constant and overlapping reviews, and a lack of agreement by relevant governments themselves or the need for more timely progress to a genuinely NEM-wide approach to energy regulation."

Responding to the report, Resources and Energy Minister
Gary Gray
said the government would consider ways to “expedite reform processes where ­possible".

The commission finds the average price rises of 70 per cent over the past five years are mainly due to spiralling network costs, partly driven by ­inefficiencies in the industry and flaws in the regulatory environment of the National Electricity Market. It highlights that low-income households without air-conditioners subsidise wealthy people who use them.

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It stopped short of recommending the full roll-out of smart meters, instead suggesting the pace of installation be determined by electricity distributors based on when it is efficient to do so.

‘Reducing benefits’

“A NEM-wide rollout at a given time would be costly, and in many uncongested regions make no difference to the required network investments, thereby reducing benefits," it said.

Last year Prime Minister
Julia Gillard
obtained an agreement from the Council of Australian Governments for electricity network reform, which included smart meters, greater powers for the Australian Energy Regulator and more management of power demand.

The commission’s report said the reforms would take too long to achieve and there was a significant risk that some aspects would not be in place until 2022, if they were not derailed by “further reviews or indecision".

“By bringing forward reform from the current completion date of 2022, the commission estimates that even under conservative assumptions, the gains in transmission alone could generate over $500 million in additional benefits," the Commission said.

Mr Gray said the COAG reforms were on track.

“The COAG reform package, which is being implemented by the Standing Council on Energy and Resources, is a comprehensive, coherent and well-considered suite of actions, to ensure that Australians do not pay more for electricity than necessary, through ­efficient electricity networks and a competitive wholesale electricity ­market," he said.

“While these reforms are currently on track, further work by the Government and its state and territory counterparts is required to deliver efficient outcomes for all electricity consumers in a timely manner."

‘Not a radical move’

The commission finds there are strong arguments for privatisation of network assets in NSW and ­Queensland.Adopting lower reliability standards could generate efficiency gains of about $2.2 billion to $3.8 billion over 30 years.

“There is no evidence that the productivity, reliability, quality or cost performance of private sector electricity network businesses is worse than their public sector equivalents. Privatisation is not a radical move. There have been few problems in Victoria or South Australia."

State and territory governments, and their regulators, also still play too large a role in setting reliability standards and regulating retailing. The Commission urges states and territories to realign reliability standards, finding the costs of avoiding isolated major blackouts may exceed consumers’ willingness to pay.

“The price-quality trade-off is invisible to most consumers. Most are unaware of the high price they pay in their electricity bills for the excessive reliability."